Do higher electricity prices drive away manufacturing jobs?

ByMatthew E. Kahn, Guest bloggerSeptember 8, 2010

California Governor Arnold Schwarzenegger speaks before signing the California Global Warming Solutions Act of 2006, AB32, on Treasure Island in San Francisco, on Sept. 27, 2006. At the time, critics speculated that rising electricity prices would cost jobs. Four years later, new data addresses the question.

Returning to California's unilateral effort to reduce its greenhouse gas emissions, I'm quoted here saying that this legislation will cost California manufacturing jobs. Was that 2008 statement correct? At that time, I worried that AB32 would raise California electricity prices (through discouraging power generation using natural gas) and mandating an aggressive renewables use (more costly wind and solar) and that rising electricity prices would lead footloose energy intensive manufacturing to migrate to areas with lower electricity prices (i.e coal fired states such as Missouri).

For local carbon regulation to cause manufacturing job "leakage", two conditions must hold. First, the regulation must raise local electricity prices and second --- industry must be responsive to such price changes and to respond by migrating somewhere else.

1. It appears that this regulation will not raise local electricity prices because of changes in its implementation. Mary Nichols recently announced that the Air Resources Board won't implement a California electricity cap and trade market if California is the only state participating. Without the cap and trade component, it will be harder for California to reach the sharp GHG goals embedded in AB32 but this recent decision will lower the short run impact of this regulation on the economy.

2. Even if electricity prices did rise due to AB32, I no longer believe that there would be a significant impact on California manufacturing? Why? New research findings that I now sketch! Don't forget how academic economics works. When there is a plausible conjecture floating around, academics collect data and study whether there is merit to the claim.

New Paper #1: Olivier Deschenes has recently released a nation wide study using state level data for over 35 years on employment by industry as a function of state electricity prices. He can't reject the hypothesis that there is a zero correlation between electricity prices and lost manufacturing jobs. This is good news for California.

New Paper #2: Erin Mansur and I will soon release a new working paper in which we disaggregate manufacturing into several subsectors. Only a subset of manufacturing industries are quite responsive to migrating away from areas with high electricity prices. These industries include; textile mills, wood products, petroleum, primary metals, and transportation equipment. There are over 15 other manufacturing industries for which we find a small effect of electricity prices on determining where manufacturing jobs go.

These two studies are brand new and my new "bottom line" is that incumbent California manufacturing is unlikely to be hurt by AB32. The key unknown is how many new firms will be born because of AB32 and will they locate in California or locate in low wage, low union places in other nations and export to California?

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